Bridging loans

What a bridge is actually for

Bridging finance exists to solve a timing problem. You need funds now, the money that will repay them arrives later, and a term mortgage cannot be arranged in the window available or cannot be arranged on that property at all. The loan is short, it is secured on property, and it is priced on the assumption that it will be gone soon.

The situations we see most often are these.

• An auction purchase, where the contract is already binding and the completion date is fixed
• A chain break, where you are buying before your own sale has completed
• A property no lender will take on as it stands: no kitchen, no bathroom, uninhabitable, or a title problem being resolved
• Refurbishment work, after which the property can be mortgaged or sold
• Raising money quickly against a property you already own, for a business purpose or another purchase
• A short lease that needs extending before a term lender will look at it

In every one of those, the bridge is a means to an end. It is not a way to hold property cheaply, and it is not a substitute for a mortgage you cannot otherwise obtain.

The exit is the spine of the case

There are only three ways a bridge gets repaid: you sell something, you refinance onto longer term borrowing, or money arrives from elsewhere. The lender will want to know which one applies, and it will want that answer evidenced rather than asserted.

Sale. The lender will look at whether the property is realistically saleable in the time you have allowed, at the price you have assumed, and what the position is if it is not. Where the exit is the sale of a different property, expect questions about that property too.

Refinance. This is the exit that most often looks solid and is not. Refinancing means a term lender approving you and the property at the end of the bridge, on the criteria that apply then, not the criteria you remember. If your income is changing, if the property will be let in a way that narrows the lender list, or if the works may not be finished, the refinance is a plan and not yet an exit.

Funds from elsewhere. An inheritance, a business sale, a pension release, a court settlement. These are perfectly acceptable exits where they can be documented. Where the timing is outside your control, say so at the start, because the lender will find out and the discovery is worse than the disclosure.

Where bridging goes wrong

Most bridging problems are exit problems, not rate problems. Borrowers negotiate hard on the rate and then spend far more than they saved extending a loan whose repayment route slipped by a few months.

So we ask the uncomfortable questions before the loan is placed rather than after. What happens if the sale falls through. Which term lender would take the property once the works are done, and would it take you. What the fallback is if the first refinance is declined. If those questions have no answer, the honest advice is that the bridge should not be taken yet, and we will say that.

How the cost is put together

A bridge is not priced like a mortgage, and comparing headline rates alone will mislead you. The total cost is built from several parts, and we set all of them out in writing before you commit.

• Interest, charged monthly on the balance and quoted as a monthly rather than an annual figure
• The lender's arrangement fee, deducted from the advance in most cases
• Valuation fees, which on unusual or part-built property are higher than residential valuations
• The lender's legal costs as well as your own, since you normally pay both
• An exit or redemption administration fee with some lenders, and not with others
• Our own fee, disclosed to you in writing before you apply

Rolled-up interest

Most bridges are not paid monthly. Interest is either retained at the outset, meaning the lender holds back enough of the advance to cover the interest for the expected term, or it is rolled up and settled with the capital at redemption. Either way there is nothing to pay each month, which is why bridging works for property that produces no income.

Two consequences follow. First, retained interest reduces the money you actually receive, so the net advance is smaller than the loan amount and your deposit has to be larger than you may have planned. Second, because the interest compounds onto the debt, the balance grows every month the loan stays outstanding.

Why the term matters more than the rate

The rate sets the cost per month. The term sets how many months there are. Because arrangement and legal costs are largely fixed and are incurred whether the loan runs briefly or to full term, a bridge redeemed early is expensive per month but cheap overall, and a bridge that overruns is the opposite.

That is why we spend more time on the timetable than on the rate. Shaving the rate makes a modest difference to your total cost. Repaying a few months earlier or later makes a large one.

What the lender looks at

Bridging is asset-led, but that does not mean nobody is looking at you. Expect the lender to consider all of the following.

• The property, its condition, its location and how quickly it could be sold if the exit fails
• The exit, evidenced: a sale contract or agent's appraisal, or a term lender's appetite for the finished property
• Where your deposit and costs are coming from, with the usual source of funds checks
• Your experience, particularly where works are involved and where you are managing them yourself
• Any adverse credit, which matters less here than on a mortgage but still shapes the pricing
• Whether planning consent or building regulation sign-off is in place for what has been done or is proposed

Because we place these cases direct with the lender's own underwriters rather than through a packager, we can put the awkward parts of a case in front of a decision maker early and get a straight answer on whether it is fundable.

When a bridge is regulated, and when it is not

This distinction matters and is often glossed over. Bridging is regulated by the Financial Conduct Authority where the loan is secured on a property that you, or an immediate member of your family, occupy or intend to occupy as a home. That includes buying the house you will move into, and it includes raising money against the house you already live in.

Where the security is an investment property, a property you will refurbish and sell, or commercial premises, the loan is not usually regulated. That means the mortgage conduct rules do not apply to it, and you would not have access to the Financial Ombudsman Service in respect of the lending itself.

This type of lending is not usually regulated by the Financial Conduct Authority. Where it is unregulated you do not have the protections of the mortgage conduct rules and cannot take a complaint about the lending to the Financial Ombudsman Service.

We establish which side of the line your case sits on before we approach anyone, because it determines which lenders can help, what the process looks like and what protections you have. If someone offers you an unregulated bridge on the home you live in, stop and ask why.

How we handle a bridging case

Specialist enquiries reach Nik Mair, our managing director, on the working day they arrive. We would rather tell you on day one that a deal does not stack up than spend a fortnight discovering it together.

• We take the property, the timescale and the exit before we talk about lenders at all
• We test the exit, including what happens if it slips, and tell you if we think it is thin
• We confirm whether the loan is regulated or unregulated on the facts of your case
• We put the case to the lender's underwriters directly, with the difficult parts disclosed rather than hidden
• We set out every cost in writing, including our own fee, before you are asked to commit
• We keep the redemption date in view from the start, because that is what governs the total cost

What we charge

Our fee is typically £495, though complexity moves it, and it is always disclosed in writing before you apply. Each stage of the fee is earned when that stage is reached and is not refundable after that point. Separately, you have the right to cancel within 14 days, as set out in our Terms of Business. We are usually also paid a procuration fee by the lender.